Thursday, May 23, 2013

Asymmetric Market Power, Competition and Ethics

The
French Digital Economy Minister, Fleur Pellertin, “is reported to have stepped
in to help a French firm after its mobile phone application (AppGratis) was
suddenly dumped by Apple”.

Apples’ contract enabled the small firm to employ 45 people largely on
AppGratis products and, on the basis of this contract it projected a 22.25
million euro turnover and planned to expand with another 50 jobs.The sudden end of its contract threw
these plans into disarray and it turned to the government for help.

And the socialist Digital Minister’s solution?

“This is not virtuous behaviour appropriate to a firm of [Apple’s] size.I’m asking Apple to act responsibly and
to have an ethical behaviour fitting its brand image,” adding: “the abusive
behaviour of certain giant firms must lead to us thinking about new laws.”

Comment

This
is not uncommon in industry where strong large brand-image firms and major
government departments negotiate contractual relationships with smaller
suppliers.The terms imposed on
suppliers tend to be onerous and tend to be accepted, despite the risks to innovating firms like AppGratis in pursuit of their dreams.

Government
defence contracts are a specialist sector in their own right, of which I had
some experience while at Edinburgh Business School.Private sector
firms have similar onerous ‘one-way street’ contracts with their smaller (often
much smaller) sub-contractors.And when all else fails, bigger firms intimidate smaller contractors
into accepting onerous terms, including with little or no compensation
cancellation clauses**, the size alone of the buyers enables the imposition of
costly consequences on the smaller companies.The remedy of legal process tends to fail because the
outcome is determined by which party has the deepest pockets.

Minister
Fleur Pellertin’s default stance of “thinking about new laws” is probably an
idle threat because what exactly is she proposing in law?What is she going to get her civil
servants to draft?Granted the top
of the French civil service is among the best educated of any civil service in
the western world but their drafting new laws to circumvent the naked monopoly/oligopoly
powers of big business, suggests that their probability of designing workable “virtuous”
new laws to ensure extra-contractual “ethical behaviours” between large and
small contractors is not high.Moreover, the problem is not diminished in public sector
procurement.In France, government
is even bigger and state spending is a bigger proportion of GDP than in the UK.

“New
laws” are the default stance of politicians but usually end as a complication
to already complex legal processes without affecting the underlying power
asymmetry.

That
is why Adam Smith’s hostility to monopolies is still valid but is not easily
remedied in complex societies with wide disparities in market power.His remarks about the benefits of
competition fell on deaf-ears; the monopolising Town Guilds continued for decades,
merchants and manufacturers and their hostility to foreign imports were still
functioning up to two centuries later, including Imperial, and later
Commonwealth, Preferences in food and raw materials, and national defence
expenditures (an obvious monopoly) remained and remain high, and all monopolies are now
subsumed in the European Customs Union.

Fleur
Pellertin stepping in to “help” the very small AppGratis firm with “new laws”
is probably well meant and not just a new politician’s sound bite.The next steps for a socialist Minister
is to consider advocating public ownership as a rhetorical device to be seen by
the electorate as trying to do “something” for smaller firms.I do not suppose that Apple executives
will lose much sleep over that or that anything will come of it.

**
As a consultant negotiator (1987-2005), I found that drafting legal “getting out of
legally-binding contracts” a minor speciality.